Tom Litchford thinks of that smartphone buzzing in your pocket or purse as more than a gadget to keep you connected. The vice president of retail technology for the National Retail Federation sees the rapid spread of mobile technology as a major disruptive force bringing more change to his industry in the past five years than the previous 30, with no letup in sight.
“It’s the Wild West,” Litchford said, describing the multifront battle to create what industry insiders call the digital wallet that aims to turn your smartphone into a combination credit card, loyalty card, personal shopping assistant, in-store navigation guide, promotional billboard and ATM.
An army of merchants, tech companies, banks, payment processors, credit card and phone companies are spending serious money betting that the “mobile lifestyle” will make the digital wallet inevitable — particularly among younger consumers.
Litchford says retailers are spending upward of $30 billion over several years getting ready for the next-generation credit cards, called EMV cards, coming to the United States in 2015. EMV cards, widely used in Europe, contain a counterfeit-resistant chip, making them a less attractive target for hackers. An added benefit — new Android smartphones are equipped with “near-field communication’’ (NFC) capability that the EMV reader can accept.
Contactless payments rolled out nationwide this January to 200,000 locations as varied as McDonald’s, Walgreens and vending machines. Backed by a joint venture between AT&T, Verizon and T-Mobile known as Isis Mobile Wallet, the system uses near-field technology and is potentially available to 40 million U.S. Android phone users. While he won’t disclose exact numbers, Isis head of marketing Jaymee Johnson said two-thirds of consumers who have downloaded the app use touchless payments “six or seven times a month.”
Also, PayPal has led an effort, known as FIDO (Fast IDentity Online), to build secure and simple online identity verification.
Forrester Research projected mobile payments will reach $90 billion in the United States by 2017, up eightfold from 2012. With fees ranging from 15 cents to 30 cents per transaction — and as high as 2.9 percent on credit card charges — the fast-growing mobile segment offers a target too rich to ignore.
To make its investments pay off, the industry has to overcome several obstacles. A Federal Reserve Bank survey in 2012 of nearly 2,000 smartphone users found only 10.7 percent had used mobile payments, with 18- to 29-year olds at the high end (17.8 percent). The top objections cited were security concerns (42 percent); “Don’t see any benefit” (37 percent), and cash or plastic payments “are easier” (36 percent).
Dominic Venturo, chief innovation officer for U.S. Bank’s payment services, believes consumers are understandably reluctant to embrace new technology they’ve never seen. They only “become experimental” with someone they trust, like a bank where they keep their money, he said. The Minneapolis-based bank has invested in mobile banking since 2007 with an eye to where technology and consumer acceptance are moving, Venturo said.
He sees 2014 as a turning point. “Even a year ago, it wasn’t that clear.” Citing the EMV card launch and FIDO identity effort as examples, Venturo said, “most of the pieces of the puzzle will be in place.”
But one wild card is yet to be played. Apple has not embraced the near-field technology standard. Instead, Apple is opting for a low-energy version of Bluetooth technology for iPhone users to send payment information within its Apple stores. But the tech giant recently hinted, without giving specifics, that it’s looking at mobile payments in a bigger way, exciting many on Wall Street.
If it stays on its own technology path as it has in the past, instead of adopting the near-field standard, Apple’s entry could confuse the field. “Diversity is just proliferating. Retailers are trying to get a grip on that,” said Zilvinas Baresis, senior analyst at Celent, a financial services technology consulting firm.
Apple brings significant firepower to the battle. Baresis cited its deep technology portfolio, an army of loyal iPhone and iTunes users, strong brand recognition, bullet-proof balance sheet and an enviable track record of successful launches into new markets.
Baresis thinks Apple’s first entry is likely to be an online payment system that goes head-to-head against PayPal. Next, the company could roll out an iPhone-centric payment system built on three legs: its fingerprint identity system called TouchID, the iTunes payment backbone and millions of iPads already in retail settings.
While some on Wall Street speculate that Apple could transform the multi-trillion-dollar payments industry the way the iPod and iPhone changed music and mobile phones, Baresis doesn’t go that far.
But he does point to one recent Apple patent filing that describes an online financial services network. That would be a stretch given Apple’s tech roots and scant payment processing or credit risk management capability. But if the tech giant pulled off such a foray, that would be “much more disruptive and dangerous” to traditional banks and credit card companies, he said.
Brad Allen is a Minneapolis-based freelance journalist and former investor relations and corporate communications executive for technology companies including Imation Corp. and Cray Research. His On the Other Hand column will appear monthly. His e-mail is email@example.com.